1.2 Non-standard audit reports issued
Introduction
1.201
This article covers non-standard audit reports issued during the year 1 April
2004 to 31 March 2005 in the broader local government sector, and outlines
the nature of those reports.1
Why are we reporting this information?
1.202
An audit report is addressed to the readers of an entity’s financial statements. However, all public entities are creatures of statute, and are ultimately accountable
to Parliament. We therefore consider it important to draw Parliament’s attention
to the range of matters that give rise to non-standard audit reports.
1.203
In each case, the issues underlying a non-standard audit report are drawn to
the attention of the entity and discussed with its governing body.
What is a non-standard audit report?
1.204
A non-standard audit report2 is one that contains:
- a qualified audit opinion; and/or
- an explanatory paragraph.
1.205
The auditor expresses a qualified audit opinion because of a disagreement or
a limitation on scope. The type of opinion will be either an “adverse” opinion
(explained in paragraph 1.208), or a “disclaimer of opinion” (paragraph 1.210),
or an “except-for” opinion (paragraph 1.211).
1.206
The auditor will include an explanatory paragraph (see paragraphs 1.212-1.213)
in the audit report in order to draw attention to:
- a breach of law; or
- a fundamental uncertainty.
1.207
An explanatory paragraph is included in the audit report in such a way that it cannot be mistaken for a qualification of the opinion.
“Adverse” opinion
1.208
An “adverse” opinion is expressed when there is disagreement between the
auditor and the entity about the treatment or disclosure of a matter in the
financial statements and, in the auditor ’s judgement, the treatment or
disclosure is so material or pervasive that the report is seriously misleading.
1.209
Expression of an “adverse” opinion represents the most serious type of nonstandard
audit report.
“Disclaimer of opinion”
1.210
A “disclaimer of opinion” is expressed when the possible effect of a limitation
on the scope of the auditor’s examination is so material or pervasive that the
auditor has not been able to obtain sufficient evidence to support, and
accordingly is unable to express, an opinion on the financial statements.
“Except-for” opinion
1.211
An “except-for” opinion is expressed when the auditor concludes that either:
- the possible effect of a limitation on the scope of the auditor’s examination is, or may be, material but is not so significant as to require a “disclaimer of opinion” – in which case the opinion is qualified by using the words “except for the effects of any adjustments that might have been found necessary had the limitation not affected the evidence available to the auditor”; or
- the effect of the treatment or disclosure of a matter with which the auditor disagrees is, or may be, material but is not, in the auditor’s judgement, so significant as to require an “adverse” opinion – in which case the opinion is qualified by using the words “except for the effects of” the matter giving rise to the disagreement.
Explanatory paragraph
1.212
In certain circumstances, it may be appropriate for the auditor to include in
the audit report additional comment, by way of an explanatory paragraph,
to draw attention to a matter that is regarded as relevant to a proper
understanding of the basis of opinion on the financial statements.
1.213
For example, it could be relevant to draw attention to the entity having breached its statutory obligations, or to a fundamental uncertainty that might
make the going concern assumption inappropriate.
Non-standard audit reports issued during the year 1 April 2004 to 31 March 2005
1.214
The following table outlines the nature of the non-standard audit reports
issued during the year 1 April 2004 to 31 March 2005.
Full “adverse” opinions
| Name of entity | Financial statements period ended |
Reason for opinion |
|---|---|---|
| Hawke’s Bay Cultural Trust | 30 June 2004 | The Trust did not recognise the full value of the collection assets it owns; nor the associated depreciation expense in its financial statements. These are departures from Financial Reporting Standard No.3: Accounting for Property, Plant and Equipment, which requires collection assets not previously recognised to be recognised at fair value and depreciated. |
| Oamaru Racecourse Trustees | 30 June 2003 | The Trustees breached the law by transferring their operations to another party, which was contrary to the Trustees’ statutory obligations. As a result of the transfer of operations, the financial statements did not contain all the assets and liabilities, nor all the revenues and expenses that they otherwise would have, had the transfer not occurred. |
| Charleston Goldfields Hall Board | 30 June 1996 to
30 June 20023 |
The Board did not prepare its annual financial statements in accordance with the Public Finance Act 1989, and the financial statements did not comply with generally accepted accounting practice in New Zealand. In addition, the Board did not maintain appropriate accounting records, and the limited financial information presented did not fairly reflect the Board’s assets, liabilities, receipts and payments. |
| Millerton Hall Board | 30 June 2003 | The Board did not prepare its financial statements in accordance with the Public Finance Act 1989, and the financial statements did not comply with generally accepted accounting practice in New Zealand. However, the limited financial information presented did fairly reflect the Board’s assets, liabilities, receipts and payments. |
Partial “adverse” opinions
| Name of entity | Financial statements period ended |
Reason for opinion |
|---|---|---|
| Southland Museum and Art Gallery Trust Board Incorporated | 30 June 2004 | The Board did not recognise the museum collection assets it owns; nor the associated depreciation expense in its financial statements. These are departures from Financial Reporting Standard No. 3: Accounting for Property, Plant and Equipment, which requires museum collection assets not previously recognised to be recognised at fair value and depreciated. We expressed an unqualified opinion on the statement of cash flows. |
| Wairarapa Cultural Trust | 30 June 2004 | The Trust did not recognise all the collection assets it owns; nor the associated depreciation expense in its financial statements. These are departures from Financial Reporting Standard No. 3: Accounting for Property, Plant and Equipment, which requires collection assets not previously recognised to be recognised at fair value and depreciated. In addition, we were unable to verify some material revenues because of limited controls over these revenues prior to being recorded. |
| Tasman Bays Heritage Trust Incorporated and Group | 30 June 2003 | The Trust and group did not recognise the value of donated additions to the exhibit and collection assets and did not provide depreciation on exhibit and collection assets. These are departures from Financial Reporting Standard No. 3: Accounting for Property, Plant and Equipment, which requires donated exhibit and collection assets to be recognised at fair value and depreciation to be charged on exhibit and collection assets. We expressed an unqualified opinion on the statement of cash flows for both the Trust and the group. |
| Otago Museum Trust Board | 30 June 2004 | The Board did not recognise all of the museum collection assets it owns in the Statement of Financial Position. This is a departure from Financial Reporting Standard No. 3: Accounting for Property, Plant and Equipment, which requires museum collection assets not previously recognised to be recognised at fair value. We expressed an unqualified opinion on the statements of cash flows and service performance. |
| Museum of Transport and Technology Board | 30 June 2004 | The Board did not recognise the museum collection assets it owns; nor the associated depreciation expense in its financial statements. These are departures from Financial Reporting Standard No. 3: Accounting for Property, Plant and Equipment, which requires museum collection assets not previously recognised to be recognised at fair value and depreciated. We expressed an unqualified opinion on the statements of cash flows and service performance. |
Partial “disclaimers of opinion”
| Name of entity | Financial statements period ended |
Reason for opinion |
|---|---|---|
| Tasman Bays Heritage Trust Incorporated | 30 June 2004 | We were unable to form an opinion on the statement of financial position because the Trust did not recognise collection and exhibit assets donated to the Trust during the period 1 July 2000 to 30 June 2003. We were unable to form an opinion on the statement of financial performance because the Trust did not account for the depreciation expense on all the collection and exhibit assets it owns. In addition, the Trust did not account for a material impairment of the building from which it operates. We expressed an unqualified opinion on the statement of cash flows. |
| DC Tynan Trust4 | 31 March 2004 | The financial statements of the Trust had not previously been audited. We therefore did not form an opinion about the comparative information. The amount of certain comparative assets and liabilities enters into the determination of the current year’s result, and we were therefore unable to form an opinion about whether the financial performance of the Trust was fairly stated. In our opinion, the financial position of the Trust was fairly stated. |
“Except-for” opinions
| Name of entity | Financial statements period ended |
Reason for opinion |
|---|---|---|
| Waitomo District Council and Group | 30 June 2004 | We disagreed with the Group recognising a prior period adjustment, in the 2003 comparatives, in the statement of movements in equity. Financial Reporting Standard No. 7: Extraordinary Items and Fundamental Errors allows for the recognition of a prior period adjustment only in the event of a fundamental error, and in our view the error was not fundamental. |
| Owhango Public Hall | 30 June 2000,
30 June 2001 and 30 June 2002 |
in the statements of financial performance, financial position and cash flows, and it also did not provide a statement specifying the financial performance to be achieved. These are departures from the statutory reporting requirements of the Public Finance Act 1989. |
| Oakura Reserve | 30 June 2003 | The Board did not provide budgeted figures in the statements of financial performance, financial position and cash flows. This is a departure from the statutory reporting requirements of the Public Finance Act 1989. |
| Whatitiri Domain Board | 30 June 2003 | The Board did not provide budgeted figures in the statements of financial performance, financial position and cash flows. This is a departure from the statutory reporting requirements of the Public Finance Act 1989. |
| Matata Recreation Reserve Board | 30 June 2003 | The Board did not provide budgeted figures in the statements of financial position and cash flows. This is a departure from the statutory reporting requirements of the Public Finance Act 1989. |
| Ruakaka Reserve Board | 30 June 2004 | The Board did not provide budgeted figures in the statements of financial performance, financial position and cash flows. This is a departure from the statutory reporting requirements of the Public Finance Act 1989. |
| Terawhiti Licensing Trust | 31 March 2000 | Some of the Trust’s records of cash sales could not be located and there were no satisfactory audit procedures on which we could rely to verify those cash sales. In addition, we were unable to verify a write-down of property, plant and equipment in 2000 that was based on a stocktake of property, plant and equipment in 2001. |
| Mapiu Domain Board | 30 June 2003 | The Board did not provide budgeted figures in the statements of financial performance, financial position and cash flows, and it also did not provide a statement specifying the financial performance to be achieved. These are departures from the statutory reporting requirements of the Public Finance Act 1989. In addition, we were unable to verify some material revenues, because of limited controls over those revenues prior to being recorded. |
| Carparking Joint Venture5 | 30 June 2004 | We were unable to verify some material revenues because of limited controls over those revenues prior to being recorded. |
| Village Pool Charitable Trust6 | 30 June 2004 | We were unable to verify some material revenues because of limited controls over those revenues prior to being recorded. |
| Kaiteriteri Recreation Reserve Board | 30 June 2004 | We were unable to verify some material revenues because of limited controls over those revenues prior to being recorded. |
| Marton Aquatic and Leisure Trust7 | 30 June 2003 | We were unable to verify some material revenues because of limited controls over these revenues prior to being recorded. |
| Manukau Beautification Charitable Trust8 | 30 June 2003 | The financial statements of the Trust had not previously been audited. We therefore did not form an opinion about the comparative information. The amount of certain comparative assets and liabilities enters into the determination of the current year’s result, and we were therefore unable to satisfy ourselves about whether the financial performance of the Trust was fairly stated. In our opinion, the financial position of the Trust was fairly stated. |
| Waste Disposal Services9 | 30 June 2004 | We disagreed with the accounting treatment of the landfill improvements asset. The asset was overstated because capitalisation of the closure and post-closure costs in 2003 was not applied back over the periods to which they related, and therefore depreciation for previous periods was understated. |
| S J Ashby Boatbuilders Limited10 | 30 June 2004 | The financial statements of the Company had not previously been audited. We therefore did not form an opinion about the comparative information. The amount of certain comparative assets and liabilities enters into the determination of the current year’s result, and we were therefore unable to satisfy ourselves about whether the financial performance of the company was fairly stated. In our opinion, the financial position of the Company was fairly stated. |
Explanatory paragraphs
| Name of entity | Financial statements period ended |
Reason for opinion |
|---|---|---|
| Central Hawkes Bay District Council | 30 June 2004 | The Council had not complied with the Local Government Act 1974 in setting operating revenues at a level adequate to cover all projected operating expenses. In particular, the Council, having consulted its community as part of the Annual Plan process, had resolved not to set operating revenue at a level adequate to cover the decline in service potential (depreciation) relating to its bridges. |
| Central Plains Water Limited11 | 30 June 2004 | We drew attention to uncertainties surrounding the going concern assumption. The validity of the going concern assumption was dependent on the successful outcome of the proposed issue of shares to obtain the necessary capital to continue operations. |
| Whisper Tech Limited12 | 30 June 2003 | We drew attention to uncertainties surrounding the going concern assumption. The validity of the going concern assumption was dependent on the parties to the Whisper Tech Joint Venture (JV) and significant shareholders in the company supporting the JV, because it was the exclusive licensee of the company’s assets and intellectual property and there was uncertainty about the viability of the JV. |
| The Papatoetoe Licensing Trust | 31 March 2003 and
31 March 2004 |
We drew attention to uncertainties surrounding the going concern assumption. The validity of the going concern assumption was dependent on the Trust receiving financial support from a secured creditor or obtaining other sources of funding. |
| Opua Marina Management Limited13 | 30 June 2004 | We highlighted that the going concern assumption had not been used in the preparation of the financial statements, because the company’s assets and business operations were sold. |
| Pirongia Mountain Afforestation14 | 15 December 2003 | We highlighted that the going concern assumption had not been used in the preparation of the financial statements, because the entity was disestablished on 15 December 2003. |
| Hastings Tourism Facilities Trust15 | 30 June 2004 | We highlighted that the going concern assumption had not been used in the preparation of the financial statements, because the Trust’s activities were transferred to the Hastings District Council on 1 July 2004. |
| Whangarei District Council Sinking Fund Commissioners | 30 June 2004 | We highlighted that the going concern assumption had not been used in the preparation of the financial statements, because the entity was disestablished on 30 June 2004. |
| Tasman Bay Stevedoring Company Limited Employee Share Trust16 | 30 June 2004 | We highlighted that the going concern assumption had not been used in the preparation of the financial statements, because the Trust was to be wound up. |
| Hawke’s Bay Economic Development Agency Incorporated17 | 30 June 2004 | We highlighted that the going concern assumption had not been used in the preparation of the financial statements, because the Agency’s operations were to be transferred to a new entity on 1 January 2005. |
| Far North District Council Sinking Fund Commissioners | 30 June 2004 | We highlighted that the going concern assumption had not been used in the preparation of the financial statements, because the Fund was to be wound up within 12 months. |
| Bay of Plenty Provincial Patriotic Council | 30 September 2004 | We highlighted that the going concern assumption had not been used in the preparation of the financial statements, because the Council had declared its intention to wind up its operations, subject to approval from the Minister of Veterans’ Affairs. |
| Ngunguru Reserve Board | 30 June 2002 and
30 June 2003 |
We highlighted that the going concern assumption had not been used in the preparation of the financial statements, because the Reserve Board was closed on 11 September 2003. |
1: We report separately on entities that are part of the Crown reporting entity, and other public entities not within the local government portfolio, in our yearly report on the results of audits for central government.
2: A non-standard audit report is issued in accordance with the Institute of Chartered Accountants of New Zealand Auditing Standard No. 702: The Audit Report on an Attest Audit (AS-702).
3: A single audit report was issued covering the 7 years ended 30 June 2002.
4: A council-controlled organisation (CCO) controlled by Waitomo District Council.
5: A joint venture between Christchurch City Council and Addington Raceway Limited.
6: A CCO controlled by Hastings District Council.
7: A CCO controlled by Rangitikei District Council.
8: A CCO controlled by Manukau City Council.
9: A CCO subsidiary of Manukau City Council.
10: A CCO subsidiary of Far North District Council.
11: A CCO subsidiary of Selywn District Council.
12: A joint venture between Orion New Zealand Limited (a subsidiary of Christchurch City Council) and Meridian Energy Limited.
13: A CCO subsidiary of Far North District Council.
14: A CCO controlled by Waipa District Council.
15: A CCO controlled by Hastings District Council.
16: A subsidiary of Port Nelson Limited.
17: A joint venture between Napier City Council, Hastings District Council and Hawkes Bay Regional Council.
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